form10-q20080930.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)
x 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 2008 or

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______ to ______.

Commission file number:  000-13091
 
WASHINGTON TRUST BANCORP, INC.
 
(Exact name of registrant as specified in its charter)


RHODE ISLAND
  
05-0404671
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification No.)

23 BROAD STREET
    
WESTERLY, RHODE ISLAND
  
02891
(Address of principal executive offices)
  
(Zip Code)

(401) 348-1200
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes           o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Mark one)

Large accelerated filer     o
Accelerated filer     x
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes          o No

The number of shares of common stock of the registrant outstanding as of October 31, 2008 was 15,934,475.
 
FORM 10-Q
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
For the Quarter Ended September 30, 2008
     
   
Page
   
Number
     
 
   
 
   
 
 
     
 
 
     
 
 
     
   
   
   
   
 
   
   
   
   
   
Signatures
   
Exhibit 10.1 First Amendment to The Washington Trust Company Nonqualified Deferred Compensation Plan As Amended and Restated  
   
 
   
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  
   
Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  

-2-
 
 
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Dollars in thousands)

 
Unaudited
  
   
September 30,
    
December 31,
  
   
2008
    
2007
  
Assets:
            
Cash and noninterest-bearing balances due from banks
   $ 27,099     $ 30,817  
Interest-bearing balances due from banks
     588       1,973  
Federal funds sold and securities purchased under resale agreements
     21,857       7,600  
Other short-term investments
     864       722  
Mortgage loans held for sale
     1,073       1,981  
Securities available for sale, at fair value;
                
amortized cost $771,537 in 2008 and $750,583 in 2007
     753,456       751,778  
Federal Home Loan Bank stock, at cost
     42,008       31,725  
Loans:
                
Commercial and other
     841,838       680,266  
Residential real estate
     618,329       599,671  
Consumer
     308,874       293,715  
Total loans
     1,769,041       1,573,652  
Less allowance for loan losses
     22,631       20,277  
Net loans
     1,746,410       1,553,375  
Premises and equipment, net
     24,314       25,420  
Accrued interest receivable
     10,980       11,427  
Investment in bank-owned life insurance
     42,714       41,363  
Goodwill
     56,117       50,479  
Identifiable intangible assets, net
     10,461       11,433  
Other assets
     29,941       19,847  
Total assets
   $ 2,767,882     $ 2,539,940  
Liabilities:
                
Deposits:
                
Demand deposits
   $ 187,839     $ 175,542  
NOW accounts
     164,829       164,944  
Money market accounts
     298,106       321,600  
Savings accounts
     171,856       176,278  
Time deposits
     914,621       807,841  
Total deposits
     1,737,251       1,646,205  
Dividends payable
     2,824       2,677  
Federal Home Loan Bank advances
     747,430       616,417  
Junior subordinated debentures
     32,991       22,681  
Other borrowings
     30,439       32,560  
Accrued expenses and other liabilities
     32,185       32,887  
Total liabilities
     2,583,120       2,353,427  
Shareholders’ Equity:
                
Common stock of $.0625 par value; authorized 30,000,000 shares;
                
issued 13,518,868 shares in 2008 and 13,492,110 shares in 2007
     845       843  
Paid-in capital
     35,184       34,874  
Retained earnings
     163,809       154,647  
Accumulated other comprehensive loss
     (12,570 )     (239 )
Treasury stock, at cost; 95,635 shares in 2008 and 137,652 shares in 2007
     (2,506 )     (3,612 )
Total shareholders’ equity
     184,762       186,513  
Total liabilities and shareholders’ equity
   $ 2,767,882     $ 2,539,940  
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-3-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars and shares in thousands,
  
 
except per share amounts)
  
   
Unaudited
  
   
Three Months
    
Nine Months
  
Periods ended September 30,
  
2008
    
2007
    
2008
    
2007
  
Interest income:
                        
Interest and fees on loans
   $ 25,520     $ 25,032     $ 74,896     $ 73,380  
Interest on securities:
                                
Taxable
     8,504       7,565       25,222       23,196  
Nontaxable
     778       781       2,344       2,208  
Dividends on corporate stock and Federal Home Loan Bank stock
     407       669       1,516       2,072  
Other interest income
     128       275       318       650  
Total interest income
     35,337       34,322       104,296       101,506  
Interest expense:
                                
Deposits
     9,884       13,140       31,031       39,332  
Federal Home Loan Bank advances
     8,011       5,243       23,104       15,323  
Junior subordinated debentures
     524       338       1,371       1,014  
Other interest expense
     274       291       863       730  
Total interest expense
     18,693       19,012       56,369       56,399  
Net interest income
     16,644       15,310       47,927       45,107  
Provision for loan losses
     1,100       300       2,950       900  
Net interest income after provision for loan losses
     15,544       15,010       44,977       44,207  
Noninterest income:
                                
Wealth management services:
                                
Trust and investment advisory fees
     5,238       5,336       15,901       15,626  
Mutual fund fees
     1,383       1,386       4,169       4,000  
Financial planning, commissions and other service fees
     570       456       2,029       1,915  
Wealth management services
     7,191       7,178       22,099       21,541  
Service charges on deposit accounts
     1,215       1,214       3,583       3,559  
Merchant processing fees
     2,221       2,252       5,407       5,285  
Income from bank-owned life insurance
     452       376       1,352       1,166  
Net gains on loan sales and commissions on loans originated for others
     239       431       1,163       1,205  
Net gains on securities
     –       –       1,909       336  
Losses on write-downs of investments to fair value
     (982 )     –       (2,989 )     –  
Other income
     254       399       1,269       1,129  
Total noninterest income
     10,590       11,850       33,793       34,221  
Noninterest expense:
                                
Salaries and employee benefits
     10,580       10,098       31,334       30,195  
Net occupancy
     1,123       1,021       3,325       3,076  
Equipment
     956       871       2,877       2,564  
Merchant processing costs
     1,857       1,916       4,523       4,493  
Outsourced services
     700       556       2,078       1,610  
Advertising and promotion
     376       466       1,229       1,467  
Legal, audit and professional fees
     626       444       1,599       1,298  
Amortization of intangibles
     320       341       972       1,057  
Debt prepayment penalties
     –       –       –       1,067  
Other expenses
     1,933       1,599       5,730       5,354  
Total noninterest expense
     18,471       17,312       53,667       52,181  
Income before income taxes
     7,663       9,548       25,103       26,247  
Income tax expense
     1,623       2,992       7,152       8,234  
Net income
   $ 6,040     $ 6,556     $ 17,951     $ 18,013  
                                 
Weighted average shares outstanding – basic
     13,409.5       13,323.6       13,383.0       13,358.1  
Weighted average shares outstanding – diluted
     13,588.3       13,564.1       13,564.5       13,612.7  
Per share information:
                                
Basic earnings per share
   $ 0.45     $ 0.49     $ 1.34     $ 1.35  
Diluted earnings per share
   $ 0.44     $ 0.48     $ 1.32     $ 1.32  
Cash dividends declared per share
   $ 0.21     $ 0.20     $ 0.62     $ 0.60  
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-4-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
     
   
Unaudited
  
Nine months ended September 30,
  
2008
    
2007
  
Cash flows from operating activities:
            
Net income
   $ 17,951     $ 18,013  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Provision for loan losses
     2,950       900  
Depreciation of premises and equipment
     2,275       2,209  
(Gain) loss on disposal/sale of premises and equipment
     (41 )     23  
Net amortization of premium and discount
     692       466  
Amortization of intangibles
     972       1,057  
Share-based compensation
     407       427  
Non-cash charitable contribution
     –       520  
Earnings from bank-owned life insurance
     (1,352 )     (1,166 )
Net gains on loan sales
     (1,163 )     (1,205 )
Net gains on securities
     (1,909 )     (336 )
Losses on write-downs of investments to fair value
     2,989          
Proceeds from sales of loans
     47,396       47,313  
Loans originated for sale
     (45,747 )     (46,496 )
Decrease (increase) in accrued interest receivable, excluding purchased interest
     644       (731 )
Increase in other assets
     (2,469 )     (1,211 )
(Decrease) increase in accrued expenses and other liabilities
     (1,243 )     533  
Other, net
     (6 )     (3 )
Net cash provided by operating activities
     22,346       20,313  
Cash flows from investing activities:
                
Purchases of:
Mortgage-backed securities available for sale
     (170,332 )     (143,774 )
 
Other investment securities available for sale
     (1,025 )     (39,290 )
 
Other investment securities held to maturity
     –       (12,882 )
Proceeds from sale of:
Mortgage-backed securities available for sale
     –       47,938  
 
Other investment securities available for sale
     64,321       10,160  
 
Mortgage-backed securities held for sale
     –       38,501  
 
Other investment securities held to maturity
     –       21,698  
Maturities and principal payments of:
Mortgage-backed securities available for sale
     70,434       50,042  
 
Other investment securities available for sale
     13,976       14,957  
 
Mortgage-backed securities held to maturity
     –       3,191  
 
Other investment securities held to maturity
     –       20,490  
Purchase of Federal Home Loan Bank stock
     (10,283 )     –  
Net increase in loans
     (167,605 )     (48,704 )
Proceeds from sale of loans
     18,047       –  
Purchases of loans, including purchased interest
     (46,324 )     (5,841 )
Proceeds from sale of premises and equipment, net of selling costs
     1,433       –  
Purchases of premises and equipment
     (2,561 )     (3,715 )
Equity investment in capital trusts
     (310 )     –  
Payment of deferred acquisition obligation
     (8,065 )     (6,720 )
Net cash used in investing activities
     (238,294 )     (53,949 )
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  

-5-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
(Dollars in thousands)
  
CONSOLIDATED STATEMENTS OF CASH FLOWS  (Continued)
      
       
   
Unaudited
  
Nine months ended September 30,
  
2008
    
2007
  
Cash flows from financing activities:
            
Net increase (decrease) in deposits
     91,046       (22,110 )
Net increase in other borrowings
     305       22,518  
Proceeds from Federal Home Loan Bank advances
     795,421       532,463  
Repayment of Federal Home Loan Bank advances
     (664,387 )     (504,729 )
Purchases of treasury stock, including deferred compensation plan activity
     43       (5,211 )
Net proceeds from the issuance of common stock under dividend reinvestment plan
     596       –  
Net proceeds from the exercise of stock options and issuance of other equity instruments
     179       989  
Tax benefit from stock option exercises and issuance of other equity instruments
     199       723  
Proceeds from the issuance of junior subordinated debentures, net of debt issuance costs
     10,016       –  
Cash dividends paid
     (8,174 )     (7,904 )
Net cash provided by financing activities
     225,244       16,739  
Net increase (decrease) in cash and cash equivalents
     9,296       (16,897 )
Cash and cash equivalents at beginning of period
     41,112       71,909  
Cash and cash equivalents at end of period
   $ 50,408     $ 55,012  
                 
                 
Noncash Investing and Financing Activities:
                
Loans charged off
   $ 818     $ 553  
Increase to deferred acquisition obligation
     5,638       5,921  
Net transfers from loans to property acquired through foreclosure or repossession
     113       −  
Held to maturity securities transferred to available for sale
     −       162,977  
Supplemental Disclosures:
                
Interest payments
     56,034       56,792  
Income tax payments
     10,427       8,965  
                 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
  
-6-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
  
 
 
 
General
Washington Trust Bancorp, Inc. (the “Bancorp”) is a publicly-owned registered bank holding company and financial holding company.  The Bancorp owns all of the outstanding common stock of The Washington Trust Company (the “Bank”), a Rhode Island chartered commercial bank founded in 1800.  Through its subsidiaries, the Bancorp offers a complete product line of financial services to individuals and businesses including commercial, residential and consumer lending, retail and commercial deposit products, and wealth management services through its offices in Rhode Island, Massachusetts and southeastern Connecticut, ATMs, and its Internet web site (www.washtrust.com).

(1) Basis of Presentation
The consolidated financial statements include the accounts of the Bancorp and its subsidiaries (collectively, the “Corporation” or “Washington Trust”).  All significant intercompany transactions have been eliminated.  Certain prior period amounts have been reclassified to conform to the current period’s classification.  Such reclassifications have no effect on previously reported net income or shareholders’ equity.

The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”) and to general practices of the banking industry.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to near-term change are the determination of the allowance for loan losses and the review of goodwill, other intangible assets and investments for impairment.

In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Corporation’s financial position as of September 30, 2008 and December 31, 2007, respectively, and the results of operations and cash flows for the interim periods presented.  Interim results are not necessarily reflective of the results of the entire year.  The unaudited consolidated financial statements of the Corporation presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Washington Trust Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.

(2) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures of fair value measurements.  SFAS No. 157 applies to the accounting principles that currently use fair value measurement and does not require any new fair value measurements.  The expanded disclosures focus on the inputs used to measure fair value as well as the effect of the fair value measurements on earnings. SFAS No. 157 is effective as of the beginning of the first fiscal year beginning after November 15, 2007 and interim periods within that fiscal year.  The adoption of SFAS No. 157 for financial assets and liabilities did not have a material impact on the Corporation’s financial position or results of operations.  The required disclosures about fair value measurements for financial assets and liabilities have been included in Note 10.  In accordance with FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” the effective date of SFAS No. 157 as it applies to nonfinancial assets, such as goodwill, and nonfinancial liabilities has been delayed to January 1, 2009.  The Corporation is currently evaluating the impact that the adoption of SFAS No. 157 for nonfinancial assets and liabilities will have on the Corporation’s financial position and results of operations.  On October 10, 2008, the FASB issued FASB Staff Position No. 157-3, “Determining the Fair Value of a Financial Asset When the Market of That Asset Is Not Active,” to clarify the application of SFAS No. 157 in a market that is not active.  FASB Staff Position No. 157-3 was effective upon issuance, including prior periods for which financial statements have not been issued.  The Corporation complied with the guidance in FASB Staff Position No. 157-3 in determining the fair value of its securities at September 30, 2008.
-7-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans (an amendment of FASB Statements No. 87, 88, 106 and 132R)” (“SFAS No. 158”).  The requirement to measure the plan’s assets and obligations as of the employer’s fiscal year end was adopted effective January 1, 2008.  The adoption of the measurement date provision of SFAS No. 158 did not have a material impact on the Corporation’s financial position or results of operations.  See further discussion in Note 11.

The SEC released Staff Accounting Bulletin (“SAB”) No. 109 in November 2007.  SAB No. 109 provides guidance on written loan commitments that are accounted for at fair value through earnings.  SAB No. 109 supersedes SAB No. 105, which provided guidance on derivative loan commitments pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Transactions” (“SFAS No 133”).  SAB No. 105 stated that in measuring the fair value of a derivative loan commitment it would be inappropriate to incorporate the expected net future cash flows related to the associated loan.  SAB No. 109, consistent with the guidance in SFAS No. 156 and SFAS No. 159, requires that expected net future cash flows related to the associated servicing of the loan be included in the measurement of all written loan commitments that are accounted for at fair value through earnings.  The guidance in SAB No. 109 is applied on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.  The adoption of SAB No. 109 did not have a material impact on the Corporation’s financial position or results of operations.

The SEC released SAB No. 110 in December 2007.  SAB No. 110 provides guidance on the use of a "simplified" method, as discussed in SAB No. 107, in developing an estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment”.  SAB No. 107 did not expect a company to use the simplified method for share option grants after December 31, 2007.  At the time SAB No. 107 was issued, the SEC believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies.  The SEC understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the SEC will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.  The adoption of SAB No. 110 did not have a material impact on the Corporation’s financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”).  SFAS No. 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged.  SFAS No. 161 encourages but does not require comparative disclosures for earlier periods at initial adoption.  The Corporation will provide the additional disclosures necessary upon the adoption of SFAS No. 161.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP.  The current GAAP hierarchy is set forth in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.”  The FASB has concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and issued SFAS No. 162 to achieve that result.  SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to Interim Auditing Standards AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”.  The FASB does not expect that SFAS No. 162 will result in a change in current practice.
-8-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(3) Securities
Securities are summarized as follows:
 
(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
September 30, 2008
  
Cost
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
  of U.S. government-sponsored agencies
   $ 76,013     $ 1,949     $ −     $ 77,962  
Mortgage-backed securities issued by U.S.
                                
  government and government-sponsored agencies
     568,495       2,385       (4,904 )     565,976  
States and political subdivisions
     80,685       34       (4,091 )     76,628  
Trust preferred securities
     37,985       −       (12,201 )     25,784  
Corporate bonds
     1,748       −       (14 )     1,734  
Common stock
     1,458       350       (36 )     1,772  
Perpetual preferred stocks
     5,153       −       (1,553 )     3,600  
Total securities available for sale
   $ 771,537     $ 4,718     $ (22,799 )   $ 753,456  


(Dollars in thousands)
                        
   
Amortized
    
Unrealized
    
Unrealized
    
Fair
  
December 31, 2007
  
Cost
    
Gains
    
Losses
    
Value
  
Securities Available for Sale:
                        
U.S. Treasury obligations and obligations
                        
  of U.S. government-sponsored agencies
   $ 136,721     $ 2,888     $ (10 )   $ 139,599  
Mortgage-backed securities issued by U.S.
                                
  government and government-sponsored agencies
     469,197       2,899       (2,708 )     469,388  
States and political subdivisions
     80,634       499       (239 )     80,894  
Trust preferred securities
     37,995       −       (3,541 )     34,454  
Corporate bonds
     13,940       161       −       14,101  
Common stocks
     3,931       2,850       −       6,781  
Perpetual preferred stocks
     8,165       −       (1,604 )     6,561  
Total securities available for sale
   $ 750,583     $ 9,297     $ (8,102 )   $ 751,778  

Securities available for sale with a fair value of $667.8 million and $592.7 million were pledged in compliance with state regulations concerning trust powers and to secure Treasury Tax and Loan deposits, borrowings, and certain public deposits at September 30, 2008 and December 31, 2007, respectively.  In addition, securities available for sale with a fair value of $7.4 million and $8.4 million were collateralized for the discount window at the Federal Reserve Bank at September 30, 2008 and December 31, 2007, respectively.  There were no borrowings with the Federal Reserve Bank at either date.  Securities available for sale with a fair value of $8.8 million and $1.9 million were designated in rabbi trusts for nonqualified retirement plans at September 30, 2008 and December 31, 2007, respectively.  As of September 30, 2008 and December 31, 2007, securities available for sale with a fair value of $521 thousand and $532 thousand, respectively, were pledged as collateral to secure certain interest rate swap agreements.

During the nine months ended September 30, 2008, impairment charges of $3.0 million were recognized on equity security perpetual preferred stock holdings issued by FHLMC, FNMA and two other corporate issuers that were deemed to be other-than-temporarily impaired based on an analysis of the financial condition and operating outlook of the issuers.  These charges were reported in losses on write-downs of investments to fair value in the Consolidated Statements of Income for the nine months ended September 30, 2008.
-9-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

The following table summarizes temporarily impaired securities as of September 30, 2008, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)
  
Less than 12 Months
    
12 Months or Longer
    
Total
  
         
Fair
    
Unrealized
          
Fair
    
Unrealized
          
Fair
    
Unrealized
  
At September 30, 2008
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
Mortgage-backed securities
                                                            
issued by U.S. government and government-sponsored agencies
     60     $ 254,991     $ 2,453       25     $ 62,950     $ 2,451       85     $ 317,941     $ 4,904  
States and
                                                                        
political subdivisions
     90       64,702       3,273       8       8,836       818       98       73,538       4,091  
Trust preferred securities
     –       –       –       13       25,784       12,201       13       25,784       12,201  
Corporate bonds
     1       1,734       14       –       –       –       1       1,734       14  
Subtotal, debt securities
     151       321,427       5,740       46       97,570       15,470       197       418,997       21,210  
Common stock
     2       1,341       36       –       –       –       2       1,341       36  
Perpetual preferred stock
     1       1,000       710       6       2,511       843       7       3,511       1,553  
Subtotal, equity securities
     3       2,341       746       6       2,511       843       9       4,852       1,589  
Total temporarily
                                                                        
impaired securities
     154     $ 323,768     $ 6,486       52     $ 100,081     $ 16,313       206     $ 423,849     $ 22,799  

The following table summarizes temporarily impaired securities as of December 31, 2007, segregated by length of time the securities have been in a continuous unrealized loss position.

(Dollars in thousands)
  
Less than 12 Months
    
12 Months or Longer
    
Total
  
         
Fair
    
Unrealized
          
Fair
    
Unrealized
          
Fair
    
Unrealized
  
At December 31, 2007
     #    
Value
    
Losses
       #    
Value
    
Losses
       #    
Value
    
Losses
  
U.S. Treasury obligations
                                                            
and obligations of U.S. government-sponsored agencies
     1     $ 6,996     $ 1       1     $ 3,990     $ 9       2     $ 10,986     $ 10  
Mortgage-backed securities
                                                                        
issued by U.S. government and government-sponsored agencies
     22       108,630       1,028       46       110,348       1,680       68       218,978       2,708  
States and
                                                                        
political subdivisions
     13       12,402       128       10       7,681       111       23       20,083       239  
Trust preferred securities
     8       23,167       2,769       5       11,287       772       13       34,454       3,541  
Subtotal, debt securities
     44       151,195       3,926       62       133,306       2,572       106       284,501       6,498  
Perpetual preferred stock
     5       5,258       1,495       4       1,304       233       9       6,562       1,728  
Total temporarily
                                                                        
impaired securities
     49     $ 156,453     $ 5,421       66     $ 134,610     $ 2,805       115     $ 291,063     $ 8,226  

Unrealized losses on debt securities generally occur as a result of increases in interest rates since the time of purchase, a structural change in an investment or from deterioration in credit quality of the issuer.  Management evaluates impairments in value whether caused by adverse interest rates or credit movements to determine if they are other-than-temporary.

In accordance with applicable accounting literature, Washington Trust must, in addition to other criteria, demonstrate an ability and intent to hold temporarily impaired securities until full recovery of their cost basis to classify such losses as temporary.  Management uses both internal and external information sources to arrive at the most informed decision.  This quantitative and qualitative assessment begins with a review of general market conditions and changes to market conditions, credit, investment performance and structure since the prior review period.  The ability to hold temporarily impaired securities will involve a number of factors, including: forecasted recovery period based on average life and Washington Trust’s capital, earnings and cash flow positions, among other things. Washington Trust
-10-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
currently intends to hold all temporarily impaired securities to full recovery of the cost basis, which may be until maturity.

Management assesses a variety of factors in determining if an impairment is other than temporary, including but not limited to, the likelihood of and probable time horizon for recovery of the cost basis, including analyst forecasts, earnings assumptions and other company specific or sector financial performance metrics.

Debt securities in an unrealized loss position at September 30, 2008 consisted of 197 debt security holdings.  The majority of the loss for debt securities reported in an unrealized loss position at September 30, 2008 was concentrated in variable rate trust preferred securities issued by financial services companies and in U.S. agency or government-sponsored agency mortgage-backed securities.

Included in debt securities in an unrealized loss position at September 30, 2008 were 13 trust preferred security holdings.  These holdings represent seven individual name issuers in the financial industry, including, where applicable, the impact of mergers and acquisitions of issuers subsequent to original purchase, and two pooled trust preferred securities in the form of collateralized debt obligations.  The aggregate unrealized losses on the 13 trust preferred holdings amounted to $12.2 million, or 32% of amortized cost, as of September 30, 2008.  Management believes the September 30, 2008 temporary impairment on trust preferred securities, including the pooled trust preferred holdings, was not a function of underlying credit issues associated with the issuers of the debt obligations and primarily reflected increased investor concerns beginning in the latter part of 2007 and continuing into 2008 about recent losses in the financial services industry related to sub-prime lending and sub-prime exposure.  These concerns resulted in a substantial decrease in market liquidity and increased risk premiums for securities in this sector.  Credit spreads for issuers in this sector widened substantially during recent months, causing prices for these securities holdings to decline.  As recently as September 30, 2007, the aggregate unrealized loss position of the 13 trust preferred holdings was 6.3% of amortized cost and the aggregate unrealized loss position at December 31, 2007 was 9.3% of amortized cost for these holdings.  The largest unrealized loss dollar amount of any single individual name issuer was $2.0 million, or 21% of its amortized cost, at September 30, 2008.  As of September 30, 2008, the amortized cost and fair value of the two pooled trust preferred holdings was $7.5 million and $3.0 million, respectively.  The pooled trust preferred holdings consist of trust preferred obligations of banking industry companies and, to a lesser extent, insurance industry companies.  Valuations of the pooled trust preferred holdings are also dependent in part on cash flows from underlying issuers.  Unexpected cash flow disruptions could have an adverse impact on the fair value and performance of these pooled trust preferred securities.  For both of its pooled trust preferred holdings, Washington Trust’s investment is senior to one or more subordinated tranches which have first loss exposure.  As part of management’s evaluation to determine if impairment is other-than-temporary, management prepared an analysis consistent with EITF 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to Be Held by a Transferor in Securitized Assets", and concluded that there was no adverse change in cash flows on these two pooled trust preferred securities.  All individual name trust preferred debt securities and the respective tranche of the pooled trust preferred securities held in our portfolio continue to accrue and make payments as expected, and all have credit ratings at or above investment grade minimums.  Washington Trust has the ability and intent to hold these securities to full recovery of the cost basis and management does not consider these investments to be other-than-temporarily impaired at this time.

The unrealized losses on U.S. agency or government-sponsored agency mortgage-backed securities was concentrated in securities purchased during 2003 and 2004, during which time interest rates were at or near historical lows.  The fair value for these and the state and municipal holdings included in this analysis have declined due to a combination of factors, including the relative increase in short and medium term interest rates since the time of purchase, decreased liquidity and rising risk premiums for credit-sensitive securities, and downgrades in credit ratings for municipal bond insurers.  The largest unrealized loss percentage amount on any holding in these categories was 8.75% of its amortized cost at September 30, 2008.  Management believes that the nature and duration of impairment on these debt security holdings are a function of changes in investment spreads and interest rate movements.  Washington Trust has the ability and intent to hold these securities to full recovery of the cost basis and management does not consider these investments to be other-than-temporarily impaired.

The equity securities in an unrealized loss position at September 30, 2008 consisted of 9 holdings of financial and commercial entities with unrealized losses of $1.6 million, or 25% of their aggregate cost.  During the nine months
-11-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
ended September 30, 2008, Washington Trust recorded $3.0 million in impairment charges on perpetual preferred stock holdings issued by FHLMC, FNMA and two other corporate issuers, based on an analysis of the financial condition and operating outlook of the issuers.  As of September 30, 2008, the Corporation had 2 perpetual preferred stock holdings of FHLMC and FNMA with a total fair value and carrying value of $89 thousand and 7 perpetual preferred stock holdings of financial and utility companies with a total fair value of $3.5 million and unrealized losses of $1.6 million.  In October 2008, the SEC’s Office of the Chief Accountant, after consultation and concurrence with the FASB, concluded that the assessment of other-than-temporary impairment of perpetual preferred securities for third quarter filings made after October 14, 2008 can be made using an impairment model (including an anticipated recovery period) similar to a debt security provided there has been no evidence of a deterioration in credit of the issuer.  Washington Trust complied with this guidance in it’s evaluation of other-than-temporary impairment of perpetual preferred stocks.  Causes of conditions whereby the fair value of equity securities is less than cost include the timing of purchases and changes in valuation specific to individual industries or issuers.  The relationship between the level of market interest rates and the dividend rates paid on individual equity securities may also be a contributing factor.  Management believes that a portion of the September 30, 2008 temporary impairment on its equity securities holdings was not a function of the financial condition and operating outlook of the issuers and reflected increased investor concerns beginning in the latter part of 2007 and continuing into 2008 about recent losses in the financial services industry related to sub-prime lending and sub-prime exposure.  These concerns resulted in greater volatility in market prices for both common and preferred stocks in this market sector.  Washington Trust has the ability and intent to hold these investments to full recovery of the cost basis and considers the unrealized losses on these equity securities to be temporary.

Further deterioration in credit quality of the companies backing the securities and/or a continuation of the current imbalances in liquidity that exist in the marketplace may further effect the fair value of these securities and increase the potential that certain unrealized losses be designated as other than temporary in future periods and the Corporation may incur additional write-downs.
-12-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

(4) Loan Portfolio
The following is a summary of loans:
 
(Dollars in thousands)
  
September 30, 2008
    
December 31, 2007
  
   
Amount
    
%
    
Amount
    
%
  
Commercial:
                        
Mortgages (1)
   $ 394,085       22 %   $ 278,821       18 %
Construction and development (2)
     51,592       3 %     60,361       4 %
Other (3)
     396,161       23 %     341,084       21 %
Total commercial
     841,838       48 %     680,266       43 %
                                 
Residential real estate:
                                
Mortgages (4)
     604,205       34 %     588,628       37 %
Homeowner construction
     14,124       1 %     11,043       1 %
Total residential real estate
     618,329       35 %     599,671       38 %
                                 
Consumer:
                                
Home equity lines
     158,837       9 %     144,429       9 %
Home equity loans
     93,690       5 %     99,827       6 %
Other
     56,347       3 %     49,459       4 %
Total consumer
     308,874       17 %     293,715       19 %
Total loans (5)
   $ 1,769,041       100 %   $ 1,573,652       100 %
 
(1)
Amortizing mortgages, primarily secured by income producing property.
(2)
Loans for construction of residential and commercial properties and for land development.
(3)
Loans to businesses and individuals, a substantial portion of which are fully or partially collateralized by real estate.
(4) 
A substantial portion of these loans is used as qualified collateral for Federal Home Loan Bank borrowings (See Note 7 for additional discussion of Federal Home Loan Bank borrowings).
(5)
Includes net deferred loan origination costs of $10 thousand and net discounts on purchased loans of $296 thousand at September 30, 2008, compared to net deferred fees of $100 thousand and net premiums on purchased loans of $297 thousand at December 31, 2007.

Nonaccrual Loans
The balance of loans on nonaccrual status as of September 30, 2008 was $6.7 million, compared to $4.3 million at December 31, 2007.  The $2.4 million increase in nonaccrual loans was largely due to certain commercial loan relationships moving into the non-accruing loan classification.

(5) Allowance for Loan Losses
The following is an analysis of the allowance for loan losses:
 
(Dollars in thousands)
  
   
Three months
    
Nine months
  
Periods ended September 30,
  
2008
    
2007
    
2008
    
2007
  
Balance at beginning of period
   $ 21,963       19,327     $ 20,277     $ 18,894  
Provision charged to expense
     1,100       300       2,950       900  
Recoveries of loans previously charged off
     60       27       222       231  
Loans charged off
     (492 )     (182 )     (818 )     (553 )
Balance at end of period
   $ 22,631     $ 19,472     $ 22,631     $ 19,472  

-13-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
(6) Goodwill and Other Intangibles
The changes in the carrying value of goodwill and other intangible assets for the nine months ended September 30, 2008 are as follows:
 
Goodwill
 
(Dollars in thousands)
        
Wealth
        
   
Commercial
    
Management
        
   
Banking
    
Service
        
   
Segment
    
Segment
    
Total
  
Balance at December 31, 2007
   $ 22,591     $ 27,888     $ 50,479  
Additions to goodwill during the period
     –       5,638       5,638  
Impairment recognized
     –       –       –  
Balance at September 30, 2008
   $ 22,591     $ 33,526     $ 56,117  

The Stock Purchase Agreement for the August 2005 acquisition of Weston Financial Group, Inc. (“Weston Financial”) provides for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008.  During the third quarter of 2008, the Corporation recognized a liability of $5.6 million, with a corresponding increase to goodwill, representing the amounts earned under the terms of the Stock Purchase Agreement.

Other Intangible Assets
 
(Dollars in thousands)
  
Core Deposit
    
Advisory
    
Non-compete
        
   
Intangible
    
Contracts
    
Agreements
    
Total
  
Balance at December 31, 2007
   $ 510     $ 10,743     $ 180     $ 11,433  
Amortization
     90       845       37       972  
Balance at September 30, 2008
   $ 420     $ 9,898     $ 143     $ 10,461  

Amortization of intangible assets for the nine months ended September 30, 2008 totaled $972 thousand.  Estimated annual amortization expense of current intangible assets with finite useful lives, absent any impairment or change in estimated useful lives, is summarized below.
 
(Dollars in thousands)
                        
   
Core
    
Advisory
    
Non-compete
        
Estimated amortization expense:
  
Deposits
    
Contracts
    
Agreements
    
Total
  
2008 (full year)
   $ 120     $ 1,111     $ 49     $ 1,280  
2009
     120       1,040       49       1,209  
2010
     120       922       49       1,091  
2011
     120       768       33       921  
2012
     30       727       −       757  

The components of intangible assets at September 30, 2008 are as follows:
 
(Dollars in thousands)
  
Core
    
Advisory
    
Non-compete
        
   
Deposits
    
Contracts
    
Agreements
    
Total
  
Gross carrying amount
   $ 2,997     $ 13,657     $ 1,147     $ 17,801  
Accumulated amortization
     2,577       3,759       1,004       7,340  
Net amount
   $ 420     $ 9,898     $ 143     $ 10,461  

-14-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
 
(7) Borrowings
Federal Home Loan Bank Advances
Advances payable to the Federal Home Loan Bank (“FHLB”) are summarized as follows:

(Dollars in thousands)
  
September 30,
    
December 31,
  
   
2008
    
2007
  
FHLB advances
   $ 747,430     $ 616,417  

In addition to outstanding advances, the Corporation also has access to an unused line of credit amounting to $8.0 million at September 30, 2008.  Under an agreement with the FHLB, the Corporation is required to maintain qualified collateral, free and clear of liens, pledges, or encumbrances that, based on certain percentages of book and market values, has a value equal to the aggregate amount of the line of credit and outstanding advances (“FHLB borrowings”).  The FHLB maintains a security interest in various assets of the Corporation including, but not limited to, residential mortgages loans, U.S. government or agency securities, U.S. government-sponsored agency securities, and amounts maintained on deposit at the FHLB.  The Corporation maintained qualified collateral in excess of the amount required to collateralize the line of credit and outstanding advances at September 30, 2008.  Included in the collateral were securities available for sale with a fair value of $524.7 million and $476.8 million that were specifically pledged to secure FHLB borrowings at September 30, 2008 and December 31, 2007, respectively.  Unless there is an event of default under the agreement with the FHLB, the Corporation may use, encumber or dispose of any portion of the collateral in excess of the amount required to secure FHLB borrowings, except for that collateral that has been specifically pledged.

Junior Subordinated Debentures
Junior subordinated debentures are summarized as follows:

(Dollars in thousands)
  
September 30,
    
December 31,
  
   
2008
    
2007
  
Junior subordinated debentures
   $ 32,991     $ 22,681  

In April 2008, the Bancorp sponsored the creation of Washington Preferred Capital Trust (“Washington Preferred”).  Washington Preferred is a Delaware statutory trust created for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Bancorp.  The Bancorp is the owner of all of the common securities of Washington Preferred.  In accordance with FASB Interpretation 46-R, “Consolidation of Variable Interest Entities—Revised”, Washington Preferred will be treated as an unconsolidated subsidiary.  The common stock investment in the statutory trust will be included in “Other Assets” in the Consolidated Balance Sheet.

On April 7, 2008, Washington Preferred issued $10 million of trust preferred securities (“Capital Securities”) in a private placement to two institutional investors pursuant to an applicable exemption from registration.  The Capital Securities mature in June 2038, are redeemable at the Bancorp’s option beginning after five years, and require quarterly distributions by Washington Preferred to the holder of the Capital Securities, at a rate of 6.2275% until June 15, 2008, and resets quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%.  The Bancorp has guaranteed the Capital Securities and, to the extent not paid by Washington Preferred, accrued and unpaid distributions on the Capital Securities, as well as the redemption price payable to the Capital Securities holders.  The proceeds of the Capital Securities, along with the proceeds of $310 thousand from the issuance of common securities by Washington Preferred to the Bancorp, were used to purchase $10,310,000 of the Bancorp's junior subordinated deferrable interest notes (the “Washington Preferred Debentures”) and constitute the primary asset of Washington Preferred.  The Bancorp will use the proceeds from the sale of the Washington Preferred Debentures for general corporate purposes.  Like the Capital Securities, the Washington Preferred Debentures bear interest at a rate of 6.2275% until June 15, 2008, and resets quarterly thereafter at a rate equal to the three-month LIBOR rate plus 3.50%.  The Washington Preferred Debentures mature on June 15, 2038, but may be redeemed at par at the Bancorp’s option, subject to the approval of the applicable banking regulator to the extent required under applicable guidelines or policies, at any time on or after June 15, 2013, or upon the occurrence of certain special qualifying events.
-15-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  

Other Borrowings
The following is a summary of other borrowings:
 
(Dollars in thousands)
  
September 30,
    
December 31,
  
   
2008
    
2007
  
Treasury, Tax and Loan demand note balance
   $ 2,972     $ 2,793  
Deferred acquisition obligations
     7,605       9,884  
Securities sold under repurchase agreements
     19,500       19,500  
Other
     362       383  
Other borrowings
   $ 30,439     $ 32,560  

The Stock Purchase Agreement for the August 2005 acquisition of Weston Financial provides for the payment of contingent purchase price amounts based on operating results in each of the years in the three-year earn-out period ending December 31, 2008.  Contingent payments are added to goodwill and recorded as deferred acquisition liabilities at the time the payments are determinable beyond a reasonable doubt.  Deferred acquisition obligations amounted to $7.6 million and $9.9 million at September 30, 2008 and December 31, 2007, respectively.  During the third quarter of 2008, the Corporation recognized a liability of $5.6 million, representing the amounts earned under the terms of the Stock Purchase Agreement.  In the first quarter of 2008 the Corporation paid approximately $8.1 million, which represented the 2007 earn-out payment.

(8) Shareholders’ Equity
Stock Repurchase Plan:
The Corporation’s 2006 Stock Repurchase Plan authorizes the repurchase of up to 400,000 shares of the Corporation’s common stock in open market transactions.  There were no shares repurchased under the Corporation’s 2006 Stock Repurchase Plan during the nine months ended September 30, 2008.  As of September 30, 2008, a cumulative total of 185,400 shares have been repurchased at a total cost of $4.8 million.

Pursuant to the Amended and Restated Nonqualified Deferred Compensation Plan (“Deferred Compensation Plan”), 3,423 shares were acquired during the nine months ended September 30, 2008.
-16-
WASHINGTON TRUST BANCORP, INC. AND SUBSIDIARIES
(Continued)
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  
Regulatory Capital Requirements:
 
The following table presents the Corporation’s and the Bank’s actual capital amounts and ratios at September 30, 2008 and December 31, 2007, as well as the corresponding minimum and well capitalized regulatory amounts and ratios:
 
(Dollars in thousands)
  
Actual
    
For Capital Adequacy Purposes
    
To Be Well Capitalized Under Prompt Corrective Action Provisions
  
   
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
As of September 30, 2008:
                                    
Total Capital (to Risk-Weighted Assets):
                                    
Corporation
   $ 187,468       10.45 %   $ 143,477       8.00 %   $ 179,346       10.00 %
Bank
   $ 193,878       10.82 %   $ 143,350       8.00 %   $ 179,188       10.00 %
Tier 1 Capital (to Risk-Weighted Assets):
                                                
Corporation
   $ 165,043       9.20 %   $ 71,738       4.00 %   $ 107,608       6.00 %
Bank
   $ 171,473       9.57 %   $ 71,675       4.00 %   $ 107,513       6.00 %
Tier 1 Capital (to Average Assets): (1)
                                                
Corporation
   $ 165,043       6.10 %   $ 108,185       4.00 %   $ 135,232       5.00 %
Bank
   $ 171,473       6.34 %   $ 108,103       4.00 %   $ 135,129       5.00 %
                                                 
As of December 31, 2007:
                                                
Total Capital (to Risk-Weighted Assets):
   $ 167,061       10.39 %   $ 128,648       8.00 %   $ 160,810       10.00 %
Corporation
   $ 174,750       10.87 %   $ 128,574       8.00 %   $ 160,717